Flow-Through Overview
Background
A main driver of Canada’s economic success has been the intelligent use of our plentiful natural resources. The companies that explore for and later develop the nation’s oil, natural gas, and minerals require debt or equity financing to fund their growth programs. Resource companies are often highly dependent on equity financing (issuing shares) early in their corporate lifecycle as they have many attractive resource prospects, but few producing properties that generate sufficient cash flow to finance growth internally.
Incentive
To address the financing gap, Section 66 of the Income Tax Act allows Canadian resource companies to attract Canadian investors by giving the resource company the ability to renounce (or flow-through to the investor) tax-deductible expenses. These expenses are incurred in exploring for resources and later developing their exploration successes.
Therefore, flow-through shares represent a well-established means for Canadians to obtain valuable tax deductions while participating in the growth of resource companies through share price appreciation. The tax deductions received effectively act as downside protection on the investment.
Most Canadians obtain the benefits of flow-through investing by purchasing units in a flow-through limited partnership (FTLP) that offers a professional manager to select the most promising flow-through shares.
Strategy
After the objectives are achieved in 12 to 18 months, Norrep flow-through limited partnerships (FTLPs) are wound-up and investors exchange their partnership units for an equivalent value of units in a public Norrep mutual fund. The exchange is a tax-deferred event meaning the investment continues to experience capital gains potential without tax until it is ultimately sold.
By investing in small cap energy companies, Norrep flow-through limited partnerships aim to offer a favorable risk-reward opportunity by focusing on lower-risk development (CDE) activity that delivers the same total tax benefits as riskier exploration activity. Through in-depth fundamental analysis conducted in the core of Canada’s energy sector, the energy investment team builds a concentrated portfolio that represents the best combination of value and growth.